Wednesday, July 24, 2013

Corruption - Cure is in the regulation of money !

Is it possible that there will be a day when corruption will be a non-issue?

In lot of our discussions during our Old Monk sessions or otherwise, we indulge in a numerous points of arguments and reasons why corruption happens in India. It is an established argument that it is intrinsic to human behaviors and instincts. The primary opinion that arises is that corruption is omni-present and that we are a helpless party to it.

In a country like ours, the extent and effect of corruption is worse. India is been a poor country for a long period of time without enough end-resources to distribute among its very large base of citizens. British imperialism, fragmented strata-ised society, in-ept sub-optimal policies after independence leading to unequal development and distribution of economic wealth and resources, discrimination in providing education etc has made India a hot bed for the corrupt minds to wander and fulfill its desires.

It has made it very easy for a small section of the population to take undue advantages from the Indian system of administration and political governance. In effect, it has left a huge section of the population disgruntled, unable to lead a decent respected, sufficiently privileged life. Whenever the latter is getting a chance to move into the former, they are getting corrupt for its benefits with a revenge.

Adding to that is the Indian mind-set of thinking of only about his or her own self (and immediate family) with the focus on the result or the end, rather than the means. It doesn't matter to a Brahmin that he is taking a dip in one of the dirtiest river of the world - Ganga. What matters is his belief that taking a dip absolves him of all his sins.

It doesn't matter how we secure a salaried Government job, but having a job matters. If we pay through our noses to get a particular job, it is imperative that we will cut our noses and try to regain the lost wealth and more through corrupt practices.

Morality and the notion that all human beings are good is not going to solve corruption. To err is human too, and greed is one of the seven vices of human beings. Only regulation, policing and tighter controls can reduce corruption. Regulation, policing and controls can be structured in numerous different departments, offices and systems. It is too broad to even discuss.

Lets just take regulation of money and analyze how money itself can be a solution to our greed for more money. Money in India is primarily controlled by the monetary policy of the Central Bank of India - the Reserve Bank of India through its various policies and circulars that all banks have to follow in terms of dealing in money. One of the reasons I see hope in this argument is my experience of working in for two of the biggest banks. RBI has been a robust intelligent institution with an independent mind of its own, devoid of corrupt intent to a large extent.

Argument One:
All Government aid to a citizen should be in monetary terms deposited in a bank account or a post office account of the citizen.

Over the past 60 years, the Government has instituted numerous policies and schemes for public welfare and otherwise, to help different sections of its population in various ways. Mid-day meals, Cereal Distribution through PDS and almost all such schemes are not monetary in nature. The benefit goes to certain people who then must be honest to distribute it to the masses.

If all or most of the Government aid is distributed as money to the bank accounts of its citizen, I see two important benefits. One, all monetary aid will cut the dishonest middle man. Two, money is the fuel of the economy that can start or speed up the progress and development of a society. We can refer to Keynesian Economics to understand what I am trying to refer here.

In 2000, Indian Government has spent Rs. 361 Billion on social services which include education, health, family welfare, women and child development etc. It was 11% of the total Government expenditures. Imagine the amount and level of corruption that can happen in the distribution of this amount in kind through various services.

My argument is that we should set aside the capital expenditures required to build infrastructure, and distribute the rest in terms of money transfers directly to the bank accounts of the citizens.

Argument Two:
The documentation requirements (KYC) to open an account should be relaxed so that opening an account can be pushed strategically by the Banks going to the customers.

Banking penetration in India is awe-fully inadequate on all fronts. States like Manipur, Nagaland, Bihar, Assam, Chattisgarh and Uttar Pradesh have the lowest branch penetration, upwards of 26000 people per branch. Thankfully, financial inclusion is a stated objective of the Reserve Bank of India policy. The main intent is to reduce the average population per branch. The Rangarajan Committee has defined financial inclusion as “the process of ensuring access to financial services and timely adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost”

RBI is adopting diverse modes including banking correspondents and encouraging mobile based transactions. Budget 2010-11 has, in fact, set a target of providing banking facilities to all habitations with a population over 2,000 within two years, using such modes.

My argument is that financial inclusion is a possibility when the bank account opening guidelines are made easier for all citizens. The KYC norms require a long form to be filled, identity and address verification documents and most crazily, a bank official has to meet the citizen to open his bank account. Isn't that a tough ask?

Why should account opening be such a tough task that illiterate, semi-literate and even the literate run away from opening a bank account? The reason is primarily to discourage money laundering, which is converting black money into white money for legal and illegal activities. I think this is an exaggerated fear of possibilities arrived through human logic and excessive deductions. Money laundering and such practices are done by the rich. The pertinent questions are what is percentage of rich people that we have in India, and how many of them would do money laundering or such financial crimes?

My argument is that the risk or harm is fraudulent account opening is lesser than the harm being caused by mis-apportioning of Government funds in billions in the context of the overall good of the country and its citizens. So we should make opening of accounts easy and remotely possible in mass.

Argument Three:
All cash transactions should be discouraged. Instead, electronic transfers, card based transfers, voucher based transfers, prepaid instruments etc should be incentivized.

Once we have a fix on the financial inclusion agenda in a few year, this will be easier to implement. Although, this needs infrastructure, RBI has instituted robust systems and protocols such as NEFT, RTGS, IMPS, RUPAY etc that will make cash less transfers a reality in the short future.

The argument that uneducated people can't use newer modes of payments is completely baseless. The older generation may be a bit uncomfortable with learning these new ways, but the youth of the country will pick it up and make it common-place. Who would have thought that Facebook in rural India is mostly accessed through Internet enabled mobile phones. Once the facility is available, robust, useful and is communicated well among the citizens, there is no reason that the facility won't be used.

The trading fraternity sees a lot of benefits in the cash economy. The primary benefit is tax evasion to the extent possible. What they don't realize is the indirect negative impact of tax evasion for the physical and mental health. If a business is profitable, cash transactions can never be beneficial in the long run. All big businesses therefore prefer banking transactions to cash un-accounted transactions.

My argument is that cash transactions is tightly linked to corruption and all efforts should be made to discourage cash transactions and reduce corruption.

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